Mexico Swallows Bitter Medicine For Recovery

Prices, Interest Rates Jump, But Jobs To Fall

MEXICO CITY — Now that Mexico has had a week to digest the government's latest emergency economic plan, some financial analysts and foreign lenders feel satisfied, but a lot of other people feel ill.

Prices for gasoline, electricity and other staples already have jumped 20 to 35 percent despite a government pledge that they would remain fixed until April. Other costs have also risen, and fears grow that the government's prediction of 42 percent inflation for 1995 is too low.

Annual interest rates have soared into the triple digits, topping 140 percent for credit cards. The government estimates the economy will shrink severely and that more than 500,000 of Mexico's 90 million people will lose their jobs.

The bitter medicine was expected. The economic stabilization plan announced March 9 will further tighten the money supply in the hopes that a huge dose of austerity will allow Mexico to pay down its debts and cut its trade deficit.

The idea is that consumer spending on imports will drop significantly, while a weak peso will help Mexican exporters by making their products less expensive abroad. In this way, Mexico hopes its current-account deficit of nearly $30 billion, which helped cause the country's mess, can be slashed to less than $3 billion.

Market reaction to the plan has been mixed, with the peso rebounding nicely right after the program was unveiled but then resuming its slide all this week. The currency, which has lost more than half its value since mid-December, closed down Thursday at 7.12 to the dollar.

The Bolsa stock market index has fluctuated since rallying following the announcement; Thursday, it pulled back 1.3 percent.

Most analysts warned that the performance of the markets in the short term may not provide an accurate picture of the program's promise and that effects of the plan will remain unclear for some time. The government says inflation should start easing in the last half of the year and that growth should return by the start of 1996.

The program is a classic austerity blueprint supported by Mexico's two biggest lenders: the International Monetary Fund and the United States, which have promised to provide Mexico nearly $40 billion in loans.

The orthodoxy of the plan-which some are calling "Zedilloshock" in reverse tribute to President Ernesto Zedillo Ponce de Leon-earns it praise and ridicule.

"This is textbook, a return to what Mexico was doing before 1994," said Jeffrey Schott of the Institute for International Economics in Washington. "The idea is . . . to improve the economy through export-led growth."

Schott said the plan spreads the pain to all aspects of society. But workers and small- and medium-size businesses insist they, again, are bearing most of the load.

"This is typical IMF austerity: putting the burden on the backs of the people," said Mary O'Grady of the Center for Free Enterprise Research in Mexico City. "It's not what's needed.

"The government should be looking for more ways to help business. It should also open up Pemex," O'Grady said, referring to the state-owned oil monopoly that several generations of Mexican leaders have declared untouchable.

Business leaders have railed against the plan, particularly the proposed 50 percent boost in the country's value-added tax, which applies to nearly all consumer purchases. They complain that because the crisis is the fault of the government-for allowing the peso to grow too strong last year and the accounts deficit to grow too high-the government should take more of the hit.

Federal spending should be cut beyond the proposed 9.8 percent, business leaders say, and certain agencies such as tourism and the comptroller's office should be closed. Some in business vow to stop paying taxes until the government meets their demands.

Proof of deep discontent came when Zedillo failed to get business to join a new pact with government and labor in support of the emergency plan.

Since 1987, the three groups have agreed on a series of pactos that set wage increases, prices and other fiscal goals. Zedillo tried to put together another pacto this time, but the program was so unpalatable that business refused. Labor had trouble stomaching it as well; and when business backed out, labor bolted, too.

To alleviate more of the hardship, the government did raise the minimum wage by 10 percent and is offering a federal jobs program. But the marketplace, which plays more of a role in Mexico each year, now will determine most wages and prices.

Jonathan Heath, an independent economist in Mexico City, said that while hard-hit Mexican banks are promised some help under the new program, he worries it may not be enough to save those most under pressure from holding loans that cannot be repaid.

He is also concerned that social costs may be too high, that demand from the newly unemployed will overwhelm the government's jobs program. But Heath believes that overall, the Zedillo plan is the bitter medicine that Mexico needs.

"The program is what needs to be done. It's well thought out, it has the elements it needs, and in general it should work," he said. "Monetary policy when it's applied in large doses is very effective."